Microsoft's Real Changes Are Below the Surface

The big news at Microsoft is not the Microsoft Surface tablet, but the Windows 8 'Metro' interface that runs underneath.

Dana Blankenhorn

NEW YORK (TheStreet) -- Microsoft's(:MSFT) Surface tablet, announced Monday, wasn't the company's big announcement of the week.

Neither is the expected launch Wednesday of Windows Phone 8 Apollo, a new phone operating system.

The real news is under the surface -- under the Surface, to be exact -- and is namely Windows 8 itself.

The Windows 8 "Metro" interface, first seen at E3 as Xbox SmartGlass, is the glue that now holds the Microsoft lineup together.

It does for consumer devices what Linux did for IBM's(NYSE:IBM) big iron a decade ago.

It gives all of them -- your game machine, your tablet and your phone -- a surface compatibility. They will all work in the same way. They are, from the user's perspective, compatible.

In this way Microsoft hopes to gain a much bigger share of its own customers' wallets.

If you believe in the Microsoft brand message, you will have one method for interfacing with all computer controls: office, entertainment, Internet. It will be easy to create an "Internet of Things" around you under Windows 8, automating your home, connecting you to the doctor, keeping track of your stuff.

If you prefer Apple(NYSE:AAPL), go Apple.

If you prefer Google(NYSE:GOOG), go Google.

But with the new Windows 8 line you don't have to go outside the Microsoft universe for any important technology.

Those areas where it looks weak -- TV, audio, search, social -- at least share that common interface. Those areas where it looks strong -- work, gaming -- now look stronger.

It's a strategy that not only holds the promise of growth, which is rare in a company with $70 billion in sales a year, but also avoids the antitrust problems that tripped up Microsoft under Bill Gates. Because Microsoft isn't going after the whole market here, just the whole customer.

For investors, there are some important issues to note. With Microsoft-branded hardware leading the way instead of just software, you have to think there will be some pressure on Microsoft's margins, which now hover north of 25%.

With Microsoft now putting its own name on its own stuff, there is less market available for big OEMs such as Hewlett-Packard(NYSE:HPQ) and DELL(NYSE:DELL), which will now live on the fringes of Microsoft's world, in offices and data centers. They are suddenly much less viable as consumer brands.

Instead of looking to hardware OEMs, Microsoft is looking toward software developers, companies that will bring out games and software that will be accessed via the Metro interface. That's another significant change. It brings the company back to where it was 20 years ago, only focused on consumer rather than business niches.

This is what I meant a few weeks ago when I called Microsoft "the most interesting stock in the world."

There is more risk here than we are used to seeing from the company, and more change. But there's also the chance for more gain.

At the time of publication, Blankenhorn was long MSFT, IBM, AAPL and GOOG.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.